Embracing The Long Arm Of The SEC

There has been no shortage of grumbling from private equity and hedge fund managers as the deadline for registration with the Securities and Exchange Commission under the Dodd-Frank Wall Street Reform and Consumer Protection Act has come and gone.

However, some firms are signing up even if they aren’t necessarily required to do so under Dodd-Frank, according to Alan Scholnick, managing director of financial services and real estate at advisory firm David Landau & Associates LLC.

Scholnick notes that his firm has helped New York-based hedge fund clients register even though those clients did not meet the $150 million in assets minimum indicated by Dodd-Frank. In most cases, firms see SEC registration as a means of appealing to an investor community increasingly focused on transparency and good governance.

“Compliance is become part of the due-diligence check list,” Scholnick said, adding that in some cases if an investor is trying to decide between someone who is registered with the SEC and someone who is not registered, all else being equal, the firm that’s not registered may get “left out in the cold.”

An investment officer at one mid-sized pension fund agreed, adding that any firm that wants to raise capital from the pension fund community or even the endowment world would probably need to register.

“Clearly the industry is moving in this direction. People are being proactive and getting this done,” he said.

In addition, due to difference in local laws outside of New York, many states are likely to require firms to register with local regulators even when a firm is under the $150 million AUM threshold.

That said, plenty of firms, particularly venture capital firms, don’t see any drawback to receiving an exemption from registering as investment advisers.

Chris Sugden, managing partner at Edison Ventures, which in February wrapped up Edison Venture Fund VII LP at the $249 million mark, said that investors did not make an issue about the firm’s right as a venture firm to an exemption from SEC investment adviser registration. However, he added that some limited partners did want to hear how the firm was complying with Dodd-Frank.

“They want to make sure that you have a plan in place,” said Sugden.

Edison’s Chief Financial Officer Darry Oliver added that he could see why a smaller firm or a firm without a lengthy track record might see an advantage to SEC registration.

“They’re looking for a good housekeeping seal of approval,” he said.

A partner at one small private equity firm said that although his firm is exempt from full-blown SEC registration, it may need to register down the road. He added that even the firm’s attorneys advise it register if it gets close to the $100 million mark. Although $100 million is still below the threshold for registration, if the portfolio appreciates significantly it could push a firm over that threshold.

“If your fund gets to any reasonable size, you have to think long and hard about it,” the partner said.